Malaysia is on track to achieve its goal of first-world status by 2020, despite being hit by falling oil prices and credit worries, according to analysts.
On Friday, the nation’s central bank, Bank Negara Malaysia reported a 5.6 percent increase in gross domestic product (GDP) for the three months through March compared to a year earlier, slightly ahead of economists’ forecasts of a 5.5 percent GDP gain but below the previous quarter’s 5.7 percent rise.
Exports dropped by 0.6 percent in the March quarter from a year earlier, but private investment surged 11.7 percent and private consumption gained 8.8 percent ahead of the start of a new 6 percent goods and services tax (GST) in April.
Malaysia’s current account surplus also expanded in the first quarter, rising to 10 billion Malaysian ringgit ($2.8 billion) compared to a revised 5.7 billion ringgit in the previous quarter, again beating analysts’ forecasts.
“We are going to see a sequential slowdown over the coming quarters as the front load in pre-GST spending wears off,” BMI Research’s Stuart Allsopp told Bloomberg News. “Another risk we see is a U.S.-led global economic slowdown in which case Malaysia, as an open economy which also relies on exports, would suffer.”
However, Bank Negara Malaysia’s governor Zeti Akhtar Aziz was more upbeat, saying the economy “is expected to remain on a steady growth path,” with domestic demand aided by lower oil prices.
“Investment activity is projected to remain resilient with continued capital spending by both private and public sectors,” she said. “The recovery in global growth while remaining moderate, will provide support to manufactured exports, although lower commodity prices will likely weigh down on overall exports.”
In its latest regional outlook, the International Monetary Fund (IMF) said Malaysia’s economy, currently the world’s 35th largest, would expand by 4.8 percent this year and by 4.9 percent in 2016, down from the 6 percent growth recorded in 2014, hit by falling prices of commodities such as natural gas and palm oil and the new consumption tax.
The IMF’s forecast followed Malaysian Prime Minister Najib Razak’s January prediction that the economy would expand by 4.5 to 5.5 percent this year, down from an earlier projection of as high as 6 percent.
Middle Income Trap?
However, the nation’s longer-term goal of achieving “high income nation status” by 2020 remains intact, according to a May 15 report by ANZ Research. The Australian bank’s economists Weiwen Ng and Glenn Maguire said Malaysia had made rapid gains, with gross national income per capita having risen from just $300 in 1963 to $10,808 last year, compared to the “high income” target of around $15,000.
While many Asian nations have struggled to escape the so-called “middle income trap,” the economists said Malaysia could overcome it, “especially with the structural reforms undertaken via the multi-year economic transformation program (ETP)” launched in 2010.
“With a focus of upgrading and diversifying her industrial base, Malaysia is on the cusp of joining Singapore in the high income nation bracket. The successful development path of these two economies will likely form the template that other ASEAN economies will follow in their own transformations,” they said.
According to ANZ, urbanization has been a key element in Malaysia’s growth, a self-reinforcing positive relationship that has seen the nation become ASEAN’s third most urbanized behind Singapore and Brunei.
The nation’s latest ETP scorecard showed that all targets were met for the “national key economic areas” encompassing investments in a range of industries spanning oil and gas, electronics, financial services, palm oil, tourism, business services, education and agriculture. Among the 1.4 trillion ringgit of new investments planned, large-scale infrastructure projects are already underway, including the Pengerang Integrated Complex, KL-SG High Speed Rail and Greater Kuala Lumpur transportation projects.
Since the ETP’s launch, some 775 billion ringgit of investments have been approved, with private investment climbing from 12.8 percent to 17.5 percent of GDP and inward foreign direct investment nearly doubling to an annual average of 9.1 billion ringgit.
According to ANZ, the removal of fuel subsidies and lower oil prices together with the GST’s introduction should also “free up fiscal space of around 2 percent of GDP, which could be made available for infrastructure spending.”
However, the economists warned against any easing of reforms as the target draws nearer.
“Whilst the finish line is in sight, the final lap is not going to be easy. In particular, investment (the key enabler of transformation) has started the year on a cautious note, apparent in the subdued tone of public debt security issuance and business loan activity,” they said.
“Given this subdued sentiment, we opine that the final push to first world nation won’t be without significant challenges. Implementation of gross development spending and major infrastructure projects is now critical to unlock Malaysia’s potential and sustain this investment momentum.”
In January, the Malaysian government increased its 2015 fiscal deficit target to 3.2 percent instead of the previously planned 3 percent, with falling oil prices reducing revenues. Fitch Ratings warned that it was “more likely than not” to downgrade Malaysia’s credit rating, with sentiment worsened by concern that state investment company 1Malaysia Development (1MDB) would struggle to pay its debts.
“The risk is that budget allocation for development expenditure (and hence infrastructure) might be slashed, especially if the government were to come in to bail out 1MDB,” ANZ warned.
The Malaysian prime minister has rejected calls from former leader Mahathir Mohamad to resign over 1MDB, which reportedly has racked up $15 billion of debts.
In its March survey, the IMF welcomed Malaysia’s decisions to curb fuel subsidies and introduce a GST, with the authorities’ goal of balancing the budget by 2020 expected to reduce federal debt to pre-global financial crisis levels.
“However, balancing the budget will need continued effort amidst pressures from oil revenues that are declining in relation to GDP and from rising expenditure commitments. If the decline in oil prices is permanent more measures would be required over the medium term to meet the fiscal targets, which remain feasible,” the IMF said.
Nevertheless, the IMF said Malaysia’s structural reforms would be key to achieving its goal of high-income status by 2020: “Continued investment in infrastructure and in research and development can help spur home-grown innovation and increase incomes. Together with improvements in the quality of education, these efforts can help raise labor productivity, support higher sustainable growth, and foster a more inclusive society.”
The IMF’s first deputy managing director David Lipton told a Malaysian audience that “with a sustained effort to pursue further reforms, Malaysia’s income level in 2040 could surpass that [high-income] goal, and essentially converge to the United Kingdom.”
According to one estimate, only 13 of 101 middle-income economies in 1960 graduated to high-income status by 2008, with the main failing being an inability to raise productivity by moving up the manufacturing, services or agriculture value-added chain.
For Malaysia, the target should give policymakers plenty of incentive to continue pushing reform, as it eyes joining neighboring Singapore among the world’s economic top tier.